What is the maximum gap down at open ?

M

monkeyc

I trade index ETFs like SPY and sometimes keep an overnight position. Since ES futures have overnight limit-down and limit-up of around 5%, is there any conceivable way that SPX can open outside this range?
 
It would require halting trade on the market itself, which would require something pretty extraordinary. You could take care of the gap problem by using the ES as a hedge on your SPY position as well.
 
ES has gone limit-down overnight twice since 2007, and both times SPX opened around 5% down. I would like to know what exactly could cause SPX to open outside the overnight limit range for ES? How could SPX and ES become disjoint?
 
ES went limit up on the morning the gov't banned the short selling of financial stocks in september '08. SPY was trading pre market though, up more than 5%. Don't think just because 5% is the limit that that's the most you can lose on an overnight gap.
 
WWI closed trading for a long time and the market fell 25% on the day when trading resumed, but I don't know how big the gap down was - probably quite large. The October 1987 crash caused a 50% overnight gap down on several markets like Japan, Hong Kong.

So based on precedent, the most you can lose on a gap is at least 50%.

However, neither the 1987 crash and WWI were black swans as they gave plenty of warnings - 1987 was after major support had been broken and was during a strong downtrend, and the Friday before was very skittish; WWI took quite a while (1 month) to break out after the assassination of Franz Ferdinand, and the Austro-Hungarian empire made clear warnings before declaring war on Serbia.

Basically, a good trader should have at least been aware of the risk of such large gaps and taken steps to reduce the downside risk if going long during those 2 situations. Still, if you are one of those traders who wilfully ignore fundamentals, then you will run the risk of getting blindsided by a gap like that. And there's always the possibility of a truly surprise event outside market hours.
 
Quote from Halal Burger:

Does anyone know what is the largest gap down ever for developed markets?

I know that Iceland had a 76% gap down back in 2008.
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Do you have a source for that? I hadn't heard there was such a big gap, so I'd be interested to confirm it.

Biggest gap down in developed markets would be Tokyo after the October crash, the Nikkei futures opened down around 50%. Louis Bacon bought the open and cleaned up.
 
Quote from Ghost of Cutten:

The October 1987 crash caused a 50% overnight gap down on several markets like Japan, Hong Kong.
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The HSI (index) gapped down 25% on October 26th. From Oct 1 through Oct 31 the HSI lost a total of 44% peak to trough. The N225's low (index, not future) on crash day was 15% below the previous close.

Unfortunately my N225 futures data only starts at 1988, maybe somebody else here has access to longer history? Oct 1987 was notorious for incredible discounts between futures and spot markets as rumors of the big brokers and futures exchanges "going bust" were making the rounds.
 
Quote from monkeyc:

I trade index ETFs like SPY and sometimes keep an overnight position. Since ES futures have overnight limit-down and limit-up of around 5%, is there any conceivable way that SPX can open outside this range?
More...
Just because the market is artificially locked into a range doesn't mean you can force someone to trade with you at that price.

If DC and NYC were nuked by a terrorist do you think that when the markets eventually re-opened it would only be down 5%?
 
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